Thursday Options Brief: ATVI, DNDN, HIG, DD, RCL, SFD & AMR

 |  Includes: AAL, ATVI, DD, DNDN, HIG, RCL, SFD
by: Interactive Brokers

Activision Blizzard, Inc. (NASDAQ:ATVI) – The producer of online, console and hand-held games received a vote of confidence by one large options player anticipating bullish movement in the price of its shares through expiration in January 2011. Activision’s shares rallied 2.12% to $12.05 in the first half of the trading session. The optimistic investor established a massive bullish risk reversal on the stock by selling put options to finance the purchase of calls. The trader shed 25,858 puts at the January 2011 $10 strike for a premium of $0.62 apiece in order to purchase the same number of call options at the higher January 2011 $15 strike for a premium of $0.50 each. The investor pockets a net credit of $0.12 per contract – a total of $310,296.00 – on the reversal play, which he keeps as long as Activision’s shares trade above $10.00 through expiration day. Additional profits amass should ATVI-shares surge 24.50% from the current price to surpass the $15.00-level by January expiration. The 51,170 contracts utilized by this investor represent a whopping 32.28% of total existing open interest on the stock of 158,517 lots.

Dendreon Corp. (NASDAQ:DNDN) – A bear with butterfly wings feasted on the biotechnology company’s put options today as shares of the underlying stock edged 1.15% lower to $35.99. The investor unfurled the wings of a bear-put butterfly spread in the April contract to brace for potentially significant share price erosion ahead of expiration day next month. The trader initiated the spread by purchasing 5,000 puts at the April $30 strike for a premium of $0.82 apiece [wing 1], and by picking up another 5,000 puts at the lower April $20 strike for $0.28 each [wing 2]. The central April $25 strike housed the body of the butterfly, which involved the sale of 10,000 put options for a premium of $0.40 a pop. Net premium paid for the butterfly spread amounts to just $0.30 per contract, but yields maximum potential profits of $4.70 per contract should Dendreon’s shares plummet 30.50% from the current price to $25.00 by expiration day. The most the investor can ever lose is $0.30 per contract – the premium paid for the spread – but he stands to gain more than 15 times that amount if Dendreon’s shares collapse. Options implied volatility on the stock is up 7% to 65.16% thus far in the trading session.

Hartford Financial Services Group, Inc. (NYSE:HIG) – A large-volume short straddle combination play enacted on insurer Hartford Financial Services Group indicates one investor expects HIG’s shares to remain range-bound through June expiration. Shares of the underlying stock slipped 2.45% to $27.88 during the trading day after the firm announced plans to sell $1.1 billion of senior notes as soon as today as part of a three-part offer. Hartford revealed that proceeds will be utilized to pre-fund debt maturing in 2010 and 2011, as well as to repurchase preferred shares issued to the Treasury. The straddle-seller selected the June $28 strike price to shed 15,000 calls for an average premium of $2.45 apiece in combination with the sale of 15,000 in-the-money calls at the same strike for $2.00 each. Gross premium pocketed by the investor amounts to $4.45 per contract for total maximum profits of $6.675 million. The trader retains the full amount of premium if HIG’s shares settle at $28.00 at expiration. However, the short stance taken in both calls and puts exposes the ‘straddler’ to potential losses should the share price swing violently ahead of expiration. Losses accumulate if shares rally above the upper breakeven price of $32.45, or if the stock trades below the lower breakeven point at $23.55, by expiration day in June. The investor is well protected, however, because of the large amount of premium received on the trade. Shares would need to surge 16.40% from today’s price to surpass the upper breakeven point, and would need to plummet 15.50% to breach the lower breakeven point on the straddle. The straddle-seller benefits from reductions in options implied volatility on Hartford Financial Services Group because declining volatility weighs down premium on both calls and puts. Option premium erosion may allow the investor to buy back the straddle for less than the amount received today, thus facilitating the closing of the position at a profit.

Hartford Financial Services Group, Inc. (NYSE:DD) – Hartford Financial Services Group, Inc. – The chemical maker’s shares rallied 1.45% during the session to attain a new 52-week high of $37.02 after stating it anticipates earnings per share will increase 20% per year from 2009 to 2012. Bullish investors eagerly picked up call options on the stock to position for continued near-term share price gains stemming from the firm’s earnings revelation. Investors scooped up 1,700 calls at the April $38 strike for an average premium of $0.66 apiece, while the higher April $39 strike attracted buying interest of about the same number of calls for a premium of $0.33 each. Super-bulls targeted the higher April $40 strike where more than 3,100 call options were coveted for an average premium of $0.16 per contract. Call-buyers are the April $40 strike profit only if DD’s shares increase another 8.50% from the current day’s price to breach the breakeven point on the calls at $40.16 by expiration day.

Royal Caribbean Cruises Ltd. (NYSE:RCL) – In line with cautiously optimistic words from five CEOs of major cruise lines at the annual Cruise Shipping Miami convention on Tuesday, one options investor hoping for smooth sailing at Royal Caribbean, but anticipating the occasional squall along the way, purchased 20,000 married put options on the stock this morning. Royal Caribbean’s shares are trading 0.40% lower at $31.50 as of 10:30 am (NYSE:ET). Cruise industry leaders at the convention suggested average pricing for cruises is improving and should continue to rebound along with the economy. Perhaps such optimism inspired the options player to get long the stock and shell out an additional $1.05 in premium per contract to get long 20,000 put options at the June $27 strike price. The put contracts appear to be tied to the purchase of shares of the underlying stock when RCL was trading at $31.55. The put options provide the investor with an insurance policy in cases the cruise line’s share price suffers ahead of June expiration. Downside protection kicks in if Royal Caribbean’s shares plummet 17.60% from the current value of the stock to breach the breakeven point at $25.95.

Smithfield Foods, Inc. (NYSE:SFD) – Hog producer and pork processor, Smithfield Foods, attracted horned quadrupeds this morning as bulls flooded the pig-pen with optimistic options trading activity. Shares of the underlying stock are currently up 4.25% to $19.24. Investors exchanged more than 18,500 call options at the April $20 strike, which trumps previous existing open interest at that strike of just 5,359 contracts. The surge in demand for call options on the stock lifted Smithfield’s reading of overall options implied volatility 13.1% to 39.28%. Optimistic individuals purchased 11,000 calls at the April $20 strike for an average premium of $0.51 per contract. Call-buyers stand ready to profit if the pork producer’s shares rally above the average breakeven price of $20.51 ahead of expiration day in April.

AMR Corp. (AMR) – Shares of the operator of American Airlines are trading 0.30% higher in early trading to stand at $9.62. Bullish activity dominated morning trading on the stock as investors initiated debit call spreads in the April contract. Investors purchased approximately 5,000 call options at the April $10 strike for an average premium of $0.52 apiece, and sold about the same number of calls at the higher April $12 strike for a premium of $0.08 each. The net cost of the spread amounts to $0.44 per contract, thus positioning bullish traders to accrue maximum potential profits of $1.56 per contract if AMR’s shares rally through $12.00 by April expiration day.